Wednesday, August 09, 2006

Directionally Challenged

We've been glued to the Housing sector. I admit, it's a bit of a marriage at this point - maybe not positionally (we're small long calls at these levels), but definitely trading-wise. I have a lot of reasons to like the sector and any "fell swoop" selloff is attractive. All the dips this far have been excellent buys with vol keeping its levels and even rising (I love owning calls and making money both ways)

Today's selloff is definitely attractive but I have to say that I got spooked by the trading volume. Our favorites, RYL and LEN sold off on nearly double the normal volume. The actual selling in and of itself was fine - the levels that were reached are very buyable, but when I look at the sector overall and bring the volume into the equation, I get excited about selling OTM call spreads.

So, here I am, bullish on the sector (especially at this level) and thinking to sell calls. Directionally challenged? Absolutely.

So, what do we do?

Two posts ago I made a recommendation that right now looks promising - buy gamma. One thing I am willing to bet a lot of money on is that this sector is going to keep moving and as long as you're willing to sit there and flip stock, you'll make money.

But, a little problem: RYL vol ticked at 52 today. That's the same level as it was when RYL made a big bottom in mid-July. Why a problem? Because two days ago the stock made a top. So, either this vol signals the end of the two day selling spike (which means it's about to implode), or it's going higher, which means we'll see lower levels in the stock.

So, taking that into account, gamma doesn't look so good.

Two things left on the table:
  1. A sudden move lower in the morning on volume will make for a quick play to the upside. I recommend just buying stock if you willing to play at all.
  2. If this selloff gets rejected by a sustained rally, further dips will become buyable again.
Sanity rests with option 2.

Cheers,
/Dmitry

P.S. I promise to get off this Housing topic soon as there are plenty of other things to talk about. But there is so little insight into this sector beyond the boring, regurgitated fundamental views and earnings report that seem to be carbon copies of each other, that I hope that my technical insight brings at least some new value.

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